BOND REPORT: Treasury Yields Slip As Traders Bet On Slower Rate-hike Cycle

By Mark DeCambre, MarketWatch Features Dow Jones Newswires

Crude-oil prices tumbling also weaken inflation expectations

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U.S. Treasury yields traded lower on Tuesday as a pair of Federal Reserve officials emphasized the central bank's gradual approach to lifting interest rates, while acknowledging concerns about sluggish inflation, if not a lackluster economy.

Chicago Federal Reserve President Charles Evans on Tuesday said the U.S. central bank can wait until December, rather than September, to raise key interest rates next, while Boston Federal Reserve President Eric Rosengren said lower rates may be a more permanent fixture in the market.

The yield on the 10-year Treasury note was down 3.1 basis points at 2.157%, compared with 2.188% late Monday in North American trade, while the 2-year Treasury note yield was off 2 basis points at 1.344%, versus 1.364%. The yield on the 30-year Treasury bond , known as the long bond, was down 4.7 basis points at 2.740%, compared with 2.787%.

Bond prices and yields move inversely.

"We are now at a point where we can afford, having raised the rates twice [in 2017], we can wait a little bit [for a rise in inflation]", Evans told The Wall Street Journal on Tuesday (https://www.wsj.com/articles/charles-evans-says-fed-could-wait-until-december-to-lift-rates-again-1497969515), reiterating similar comments he made late Monday. Evans is a voting member of the Fed's policy-setting committee.

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Statements from Fed officials come at a sensitive time for Treasury investors, with Janet Yellen's Fed last Wednesday lifting interest rates for only the fourth time since 2015, as it attempts to normalize monetary policy in the wake of the financial crisis. However, recent measures of inflation, notably the May reading of consumer-price index (http://www.marketwatch.com/story/inflation-falls-again-in-may-as-cpi-recedes-from-recent-high-water-mark-2017-06-14), haven't cooperated with the central bank, falling below its 2% target and compelling the Fed to reduce its inflation projection (http://www.marketwatch.com/story/fed-raises-rates-and-sets-plan-to-shrink-balance-sheet-this-year-2017-06-14).

That has caused Wall Street bond investors to question how rapidly the Fed will be inclined to lift rates in the future as it also plots a reduction of its $4.5 trillion balance sheet this year. Typically, yields rise as investors sell existing bonds in anticipation of higher coupons in the future.

The yield premium--otherwise known as the yield curve--investors demanded to hold the 30-year bond relative to the five-year note on Tuesday was 0.97 percentage point, marking the narrowest gap since November 2007. The yield curve traces yields across maturities, with a flattening curve or narrowing yield premium between maturities, typically interpreted as a sign that the economy is losing steam.

Read: Are investors too comfortable with the idea of a Fed 'policy mistake'? (http://www.marketwatch.com/story/are-investors-too-comfortable-with-the-idea-of-a-fed-policy-mistake-2017-06-20)

"The market is very sensitive to any comments now from participants of the [Federal Open Market Committee] when you have a rate-hike cycle and potential reduction of the balance sheet," said Jim Barnes head of fixed-income at Bryn Mawr Trust.

Indeed, the market has been digesting comments from a number of Fed speakers.

Earlier Tuesday, Rosengren said investors may need to get accustomed to a protracted period of low interest rates.In a speech in Amsterdam, Rosengren said lower rates may be a more permanent fixture, and that dynamic could pose financial stability risks that central bankers and investors must take seriously. Rosengren isn't a voting member of the central bank's policy-setting Federal Open Market Committee, but he still participates in deliberations.

Evans's comments came after New York Fed President William Dudley struck a more hawkish tone, arguing against slowing the pace of interest-rate increases, and describing the U.S. economy as "pretty good."

Dudley's remarks on Monday were cited as adding to yields extending gains (http://www.marketwatch.com/story/treasury-yields-climb-as-stocks-oil-lure-bidders-2017-06-19).

"People are adjusting to the idea that [Fed is] only going to raise one more time this year," said Jack Flaherty, investment director and head of fixed income at GAM.

Flaherty said recent weakness in crude-oil prices also factored into Tuesday's slide in Treasury yields. U.S. crude-oil markets were down around 2.5% and threatening to end in bear-market territory (http://www.marketwatch.com/story/oil-hovers-at-seven-month-low-as-investors-weigh-up-supply-issues-2017-06-20), defined as a drop from a recent peak of at least 20%. Lower oil decreases inflation expectations, which is supportive of bond prices, pushing yields lower. Rising inflation erodes a bond's value.

Looking ahead, investors await clarity from a speech by House Speaker Paul Ryan on tax reform, which could influence Wall Street investing.

At a speech slated to be delivered Tuesday afternoon in front of the National Association of Manufacturers, Ryan is expected to voice confidence in the GOP's ability to deliver tax-policy changes, which have been at the heart of the moves in markets, including the so-called reflation trade.

President Donald Trump had promised to bring into law a raft of pro-market stimulus measures, including tax cuts, deregulation and a boost to infrastructure spending. However, expectations that those policies could be delivered sooner than later have diminished amid drama centered on Russia's alleged ties to members of Trump's administration.

In Europe, the German benchmark 10-year yield, known as the bund, was at 0.29%, compared with 0.29% late Monday.

--Min Zeng contributed to this article

(END) Dow Jones Newswires

June 20, 2017 12:51 ET (16:51 GMT)